How can you hedge against currency risk in merchant services?

If you run a business that sells goods or services across borders, you may face currency risk. This is the risk that changes in exchange rates will affect your profits, cash flow, or competitiveness. Currency risk can be unpredictable and costly, especially in volatile markets. Fortunately, there are ways to hedge against currency risk in merchant services and protect your bottom line. Here are some strategies to consider.

1 Forward contracts

A forward contract is an agreement to buy or sell a certain amount of foreign currency at a fixed rate on a future date. This way, you can lock in the exchange rate and avoid any fluctuations. For example, if you expect to receive 100,000 euros from a customer in three months, you can enter into a forward contract with your bank to sell those euros at a predetermined rate. This will ensure that you know exactly how much revenue you will get in your domestic currency, regardless of how the euro moves.

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2 Currency options

A currency option is a contract that gives you the right, but not the obligation, to buy or sell a certain amount of foreign currency at a specified rate on or before a certain date. This way, you can benefit from favorable exchange rate movements, but also limit your downside risk. For example, if you need to pay 50,000 pounds to a supplier in six months, you can buy a currency option that allows you to buy those pounds at a fixed rate. If the pound depreciates, you can exercise your option and save money. If the pound appreciates, you can let your option expire and buy the pounds at the market rate.

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Madhavankutty G

Group Chief Economist
(edited)
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A good strategy to hedge against currency fluctuations would be to have a 'natural hedge' which is possible by exporting to global markets, especially US and Europe. This requires the products to be more competitive and adherence to quality standards. This may look a bit difficult in the present scenario of low global growth and low demand but when geo political tensions abate and recovery happens the strategy would turn out to be very profitable.

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3 Currency swaps

A currency swap is an agreement to exchange two streams of cash flows in different currencies over a period of time. This way, you can reduce your exposure to exchange rate fluctuations and match your income and expenses in the same currency. For example, if you have a loan in dollars and a revenue stream in yen, you can swap your dollar payments for yen payments with another party that has the opposite situation. This will eliminate the currency risk and lower the interest costs.

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4 Currency futures

A currency future is a standardized contract to buy or sell a certain amount of foreign currency at a set price on a specific date. This way, you can hedge against currency risk by taking a position that is opposite to your expected cash flow. For example, if you anticipate to pay 10,000 Swiss francs to a vendor in one month, you can sell a currency future that obliges you to deliver those francs at a fixed rate. This will offset any losses or gains from the exchange rate movements.

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5 Currency ETFs

A currency ETF is an exchange-traded fund that tracks the performance of a single or a basket of foreign currencies. This way, you can hedge against currency risk by investing in an ETF that corresponds to your exposure. For example, if you have a lot of transactions in Canadian dollars, you can buy a currency ETF that mimics the value of the Canadian dollar. This will hedge your currency risk and diversify your portfolio.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you hedge against currency risk in merchant services?

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1 Forward contracts

2 Currency options

3 Currency swaps

4 Currency futures

5 Currency ETFs

6 Here’s what else to consider

Financial Services

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